- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
- Privatisation
- Macroeconomic developments
submited on 15.09.2013 in category Regulated markets | Fiscal affairs | Privatisation | Political stability | Monetary policy | Macroeconomic developments
Current macroeconomic developments: challenges before the Bulgarian industry
(a summary of the latest Industry Watch analysis)
Economic situation in Europe improved slightly in the second quarter, but progress is too unstable for now. Compared to the first quarter, the euro area recorded a GDP growth of 0.3% and the total 28 EU economies – expansion by 0.4%. On annual basis, however (compared to the same quarter of 2012), the eurozone economy has decreased by 0.5% , while the EU posted zero growth.
Negative expectations are supported by the continued decline in investment activity (3.5% yoy). At the same time, the economies are still dependent on government spending that has continued to grow by 0.8% in real terms per year. Any policy of additional austerity will be reflected in a new contraction of the current demand.
Overall, the post-crisis export of Bulgarian goods has been steadily growing even amidst minimal growth in the economy and a significant drop in employment. It must be noted, however, that in the second quarter export growth slowed down - to 3.3 % over the same period of 2012, compared to 13% for the first quarter. Stagnation in the European economy - a major trading partner - has resulted in almost zero growth in exports to the EU.
A decline in consumer prices in July (by 0.6 % compared to July and by 0.7 % compared to August of the previous year) is due almost exclusively to the decisions of the government to bring down the price of electricity for households (twice this year since the winter) and new regulations in the pharmaceutical trade, lowering prices of medicine. It is too early to generalize about "deflationary processes" - while Bulgarian industry continues to face several major challenges.
Rising labor costs is a process that is likely to continue. On the one hand, from the beginning of 2013 there has been some recovery in the labor market and demand for labor has somewhat increased. On the other hand, we can expect (albeit limited) labor mobility to the EU, which in January 1, 2014 will finally open their labor markets to Bulgarians and Romanians. As a result of both increased security thresholds and insufficient supply of labor with the required qualifications, labor costs in manufacturing increased in 2013 in Bulgaria – by 5% per year in the first quarter. Labor costs in the manufacturing industry in Bulgaria increased at a faster rate than the EU average in each of the past 4 years, with the exception of the first quarter of 2011. Skilled industrial workers earn on average 65% more in 2010 compared to 2006. Rising labor costs is one of the reasons that could force manufacturers to raise prices in the coming months.
On global scale, an overall increase in energy prices can be expect due to the economic recovery in the U.S. and expanding demand in emerging markets in Asia and Latin America. On the other hand, there is the long internal process of "convergence" of energy and transport prices, that has been suppressed by various regulations over the years. Since 2010, prices of transport services increased by 5-6% , according to the NSI. A possible increase in fuel prices will make transport more expensive, which will inevitably impact the cost of industrial production .
In the last 3 years prices of key raw materials followed an upward trend. Compared to 2005, prices of raw materials have risen by 86%, according to the IMF, food's by 74% , metals' by 81% and the price of oil has doubled. Major factors contributing to the continued inflation of raw materials is the increased demand from China and other developing countries, as well as low interest rates globally.
The Bulgarian industry continues to be under pressure to set up and implement more stringent EU requirements in terms of safety, work conditions, quality standards, production processes, and pollution. Compliance induces investment costs and increases the costs of production.
The opening of the Bulgarian economy and EU membership spurred the process of catching up not only regarding European income, but also regarding EU average prices. The speed of catching up consumer prices, however, depends on the type of goods. In 2003, prices of non-durable goods were 55% of EU average, but at the end of 2012 they reached 68%. In 2003, food prices in Bulgaria were 53% of the European average, and in 2012 they are already at 67%. In 2012, dairy products and eggs are 92% of the European average compared with 76% in 2003, while tobacco products' price convergence is largely driven by the increase in the excise duty. Since 2010, however, prices of cigarettes have been frozen in one place relative to the average European level. In terms of catching up prices, which is observed in most other industries, supressing the prices of tobacco products is unsustainable over time. The biggest price increases ahead are namely in industries whose products are now relatively cheaper compared to the EU average. Therefore it can be expected that the prices of tobacco products and food in general will grow faster.
Given the factors described, we can expect several trends in key industries to emerge in the next 1 to 3 years. In sectors that sell standardized internationally tradable products, investment in renovation and modernization will persist, of course, after successfully raising the capital needed. These sectors includes mining and processors of basic materials (eg metals, energy products ). The possible approach to maintaining competitiveness is through improved efficiency, ie introduction of new processes and technologies. Selling prices will continue to be driven by global markets.
In sectors where there is idle capacity - mainly because of the economic crisis but also because of processes induced by active trade globalization - the challenge will be to find new export markets. This group includes manufacturers of clothing, furniture, building materials, and consumer durables among others. Along with some increase in exports, a small increase in the sales prices for the domestic market can also be expected.
In the sectors producing consumer goods mainly for the domestic market, the probable development will be an increase in the final price and continuation of the gradual process of "catching up" to European price levels. This effect will be mostly seen in the production of food and cigarettes. In the typical "light industry" significant investments over the past decade have already established effective production processes, while at the same time, the pressure to increase production costs is at its strongest. In these enterprises in recent years we have seen the greatest increase in regulatory requirements imposed on business processes and end products. At the same time, domestic end prices are still lower than those of many other EU members, including adjacent markets.
Producer prices have already incorporated these trends. Compared to 2010, prices in the manufacturing sector jumped 14% in July this year, as non-durable consumer goods’ prices rose - by 15%, while the prices of durable products have increased by only 2%. Inflationary pressure is strongest in the FMCG, as food prices have jumped by 23% compared to 2010, beverages by 10% and leather & footwear by 17%. Compared to 2010, cigarettes have appreciated by only 4% or two times slower than beverages and 5 times slower than food. It can be expected that a number of companies in these sectors that are pressured by the recent developments will raise prices of their products in the next 12-18 months.
You may find a more detailed version of the report (in Bulgarian) here